Jan. 26 (Bloomberg) -- President Barack Obama called on
Congress to cut the top U.S. corporate tax rate for the first
time in 25 years “without adding to our deficit,” a sign that
businesses will have to give up tax breaks in exchange for lower
rates.

The president, in his State of the Union address to
Congress last night, also pressed for simplifying the tax system
for individuals, which would restructure how more than $1
trillion in revenue is collected annually.

“The best thing we could do on taxes for all Americans is
to simplify the individual tax code,” he said, to applause from
the audience. “This will be a tough job, but members of both
parties have expressed interest in doing this, and I am prepared
to join them.”

Some analysts said Obama’s willingness to consider a
corporate tax overhaul along with tax simplification may lead to
changes in the code.

“Tax reform has been like the weather, everyone talks
about it but no one does anything about it,” said Pat Heck, a
partner at the Washington law firm KL Gates and a former top
aide to the Senate Finance Committee. “Tonight’s speech could
be a game changer. While it would be naïve to think tax reform
legislation will be drafted overnight, a long journey always
begins with a first step.”

‘Disappointed’

Representative David Camp, a Michigan Republican who chairs
the tax-writing House Ways and Means Committee, said he was
“disappointed” by the lack of details in Obama’s call for a
tax overhaul.

“I think it could have used a little bit more on his
proposals on individual tax reform,” Camp said in an interview
after the speech. “Frankly, we really need more of a path
forward even on the corporate side. I think we need some more
concrete plans.”

Obama’s proposal for a corporate tax-rate decrease,
accompanied by removal of tax breaks, is at odds with that
espoused by corporate chiefs. Robert McDonald, CEO of Procter &
Gamble Co., and groups such as the Washington-based Business
Roundtable have urged the administration and lawmakers to set
aside deficit concerns for now to focus on rate reduction.

Each percentage-point reduction in the 35 percent corporate
tax rate could cost $8 billion or more a year in foregone
revenue to the Treasury, according to the congressional Joint
Committee on Taxation.

Financing a rate cut could mean that corporate tax breaks
such as a deduction for domestic manufacturing and production
income and accelerated depreciation of capital expenses may have
to be sacrificed.

Winners and Losers

“If it’s revenue neutral for businesses, there’s probably
some winners and some losers,” said Daniel Shaviro, a professor
of taxation at the New York University School of Law. “And when
you take away a lot of special benefits, you tend to get losers
complaining more than the winners celebrating.”

The top marginal corporate tax rate, or the rate paid on the
last dollar of income earned, has stood at 35 percent since
1993.

Companies often pay a lower effective tax rate, after
taking advantage of tax credits and deductions and keeping
overseas earnings reinvested indefinitely. The U.S. is among a
handful of countries that tax profits earned in other countries,
though only when the money is brought home, or repatriated.

Obama’s call to cut the top rate “will be highly welcomed
by the business community,” though it ought to be paired with
changing the way overseas profits are taxed, said Drew Lyon, a
principal in the Washington national tax services office of
PricewaterhouseCoopers LLP. He said Obama should endorse
switching from a worldwide system of taxation to a
“territorial” system, where companies’ overseas branches and
subsidiaries pay tax only to their host governments.

Deficit Concerns

A report by the Washington advocacy group Citizens for Tax
Justice released before the speech said the goal should be to
reduce the budget deficit, which was $1.3 trillion for the
fiscal year ending Sept. 30. The report said Obama should follow
President Ronald Reagan’s example in ending more corporate tax
breaks than necessary to finance a rate cut.

The president in his speech also called for ending Bush-era
income tax cuts for individuals earning more than $200,000 and
married couples earning more than $250,000.

The tax cuts enacted under President George W. Bush for all
income levels were extended through 2012 as part of a deal Obama
worked out with congressional Republican leaders in December.

Obama also asked Congress to make permanent a stimulus tax
credit for higher education expenses, up to $10,000 for four
years of college. That proposal was estimated by the JCT last
year to cost $58.1 billion over 10 years.